Financial Audit
Restatements to the Nuclear Regulatory Commission's Fiscal Year 2003 Financial Statements Gao ID: GAO-06-30R October 27, 2005The Secretary of Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should not be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding the Nuclear Regulatory Commission's (NRC) fiscal year 2003 restatements. Going forward, we hope that the lessons learned from the fiscal year 2003 restatements, together with our recommendations, will help (1) NRC avoid the need for restatements to its future financial statements and (2) ensure that NRC's auditor applies appropriate audit procedures in future audits to test for unrecorded and unbilled licensee fees and related internal controls. We reviewed four key areas with respect to the restatements of NRC's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatements, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatements during the audit of the agency's fiscal year 2003 financial statements.
NRC's lack of effective internal controls over unrecorded and unbilled licensee fees led to the material misstatement that necessitated the restatement of NRC's originally issued fiscal year 2003 financial statements. NRC's management representation letter, dated November 20, 2003, included representations that NRC's fiscal year 2003 financial statements were fairly stated and that the agency had effective internal controls. As of the same date, the contracted independent public accountant (IPA) dated its audit report, which contained an unqualified, or clean, audit opinion on NRC's fiscal year 2003 financial statements. On December 17, 2003, certain NRC officials became aware that (1) there was an underbilling error of at least $500,000 for fiscal year 2003, (2) the underbilling error may have resulted from an internal control deficiency within NRC's licensee fee billing system that could affect the reliability of NRC's fiscal year 2003 financial statements, and (3) further research was needed to determine the cause of the error and whether the error was an isolated incident or a systemic billing system weakness. Nevertheless, on December 19, 2003, over 1 month prior to OMB's required January 30, 2004 due date for federal agencies to issue their fiscal year 2003 financial statements, NRC submitted its management representation letter and financial statements to OMB. Consistent with OMB Bulletin 01-02, NRC should have timely notified the IPA of the error and related internal control deficiency, but never did. According to the IPA, it was not aware of the material error until May 2004 when it independently discovered that NRC had recorded and billed licensee fees during fiscal year 2004 that instead should have been recorded and billed during fiscal year 2003. The IPA determined that the underbilling error resulted from certain internal control deficiencies related to NRC's fee billing system. Based on its interpretation of the American Institute of Certified Public Accountants (AICPA) Codification of Auditing Standards, the IPA stated that upon discovery of the error in May 2004, it discussed the material error with NRC but did not advise NRC to make appropriate disclosures of the newly discovered facts and their effects on the fiscal year 2003 financial statements to persons who may have been relying on such financial statements and related auditor's report. In addition, the IPA did not provide us with documentation of the basis for its conclusion that users were not likely to still be relying on the fiscal year 2003 financial statements and would not attach importance to the correction of the material error. In our view, such documentation should include the identification of potential users, such as Congress, OMB, GAO, and the Department of the Treasury (Treasury), and an analysis of whether the users would likely be relying on the fiscal year 2003 financial statements. We have some concerns that, without notification, anyone who may have been relying on the fiscal year 2003 financial statements would not have known from May to mid-November 2004, or for more than 5 months, that NRC's originally issued financial statements, which received an unqualified opinion, were materially misstated and should not be relied on. In addition to NRC's lack of effective internal controls over licensee fees, we noted two areas where additional audit procedures could have identified the problem at the time of the fiscal year 2003 audit.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-30R, Financial Audit: Restatements to the Nuclear Regulatory Commission's Fiscal Year 2003 Financial Statements
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October 27, 2005:
Mr. Jesse Funches:
Chief Financial Officer:
Nuclear Regulatory Commission:
The Honorable Hubert T. Bell:
Inspector General:
Nuclear Regulatory Commission:
Subject: Financial Audit: Restatements to the Nuclear Regulatory
Commission's Fiscal Year 2003 Financial Statements:
As you know, the Secretary of Treasury, in coordination with the
Director of the Office of Management and Budget (OMB), is required to
annually prepare and submit audited financial statements of the U.S.
government to the President and Congress. We are required to audit
these consolidated financial statements (CFS) and report on the results
of our work.[Footnote 1] An issue meriting concern and close scrutiny
that emerged during our fiscal year 2004 CFS audit was the growing
number of Chief Financial Officers (CFO) Act agencies that
restated[Footnote 2] certain of their financial statements for fiscal
year 2003 to correct errors.[Footnote 3] Errors in financial statements
can result from mathematical mistakes, mistakes in the application of
accounting principles, or oversight or misuse of facts that existed at
the time the financial statements were prepared. Frequent restatements
to correct errors can undermine public trust and confidence in both the
entity and all responsible parties. Further, when restatements do
occur, it is important that financial statements clearly communicate,
and readers of the restated financial statements understand, that the
financial statements originally issued by management in the previous
year and the opinion thereon should no longer be relied on and instead
the restated financial statements and related auditor's opinion should
be used.
Eleven of the 23 CFO Act agencies[Footnote 4] restated certain of their
financial statements for fiscal year 2003. Five CFO Act agencies had
restatements in fiscal year 2003 covering their fiscal year 2002
financial statements. Three CFO Act agencies had restatements covering
both years. We noted that the extent of the restatements to CFO Act
agencies' fiscal year 2003 financial statements varied from agency to
agency, ranging from correcting two line items on one agency's balance
sheet to correcting numerous line items on several of another agency's
financial statements. In some cases, the net operating results of an
agency were affected by the restatement. The amounts of the agencies'
restatements ranged from several million dollars to more than $91
billion.
Nine of the 11 agencies that had restatements for fiscal year 2003
received unqualified opinions on their originally issued fiscal year
2003 financial statements. The auditors for 6 of these 9 agencies
issued unqualified opinions on the restated financial statements,
replacing the previous unqualified opinions on the respective agencies'
original fiscal year 2003 financial statements. The auditors for 2 of
these 9 withdrew their unqualified opinions on the fiscal year 2003
financial statements and issued other than unqualified opinions on the
respective agencies' restated fiscal year 2003 financial statements
because they could not determine whether there were any additional
misstatements and the effect of any such misstatements on the restated
fiscal year 2003 financial statements. For the remaining agency, the
principal auditor of the agency's fiscal year 2004 financial statements
was not the principal auditor of the agency's fiscal year 2003
financial statements, and an audit opinion on the agency's restated
fiscal year 2003 financial statements was not issued.
Our review focused on the 9 agencies with restatements for fiscal year
2003 that received unqualified opinions on their originally issued
fiscal year 2003 financial statements.[Footnote 5] These were the
Department of Agriculture, Department of State, Department of Justice,
Department of Transportation, Department of Health and Human Services,
General Services Administration, National Science Foundation, Nuclear
Regulatory Commission (NRC), and Office of Personnel Management.
Because of the varying nature and circumstances surrounding the
restatements, we are issuing a number of separate reports on the
matter. This report communicates our observations regarding NRC's
fiscal year 2003 restatements. Going forward, we hope that the lessons
learned from the fiscal year 2003 restatements, together with our
recommendations, will help (1) NRC avoid the need for restatements to
its future financial statements and (2) ensure that NRC's auditor
applies appropriate audit procedures in future audits to test for
unrecorded and unbilled licensee fees and related internal controls.
We reviewed four key areas with respect to the restatements of NRC's
fiscal year 2003 financial statements: (1) the nature and cause of the
errors that necessitated the restatements, including planned corrective
actions by the agency and its auditors; (2) the timing of communicating
the material misstatement to users of the financial statements; (3) the
extent of transparency[Footnote 6] exhibited in disclosing the nature
and impact of the material misstatement in the financial statements and
the reissued auditor's report; and (4) audit issues that contributed to
the failure to detect the errors that necessitated the restatements
during the audit of the agency's fiscal year 2003 financial statements.
Results in Brief:
NRC's lack of effective internal controls over unrecorded and unbilled
licensee fees[Footnote 7] led to the material misstatement that
necessitated the restatement of NRC's originally issued fiscal year
2003 financial statements. NRC's management representation letter,
dated November 20, 2003, included representations that NRC's fiscal
year 2003 financial statements were fairly stated and that the agency
had effective internal controls. As of the same date, the contracted
independent public accountant (IPA) dated its audit report, which
contained an unqualified, or clean, audit opinion on NRC's fiscal year
2003 financial statements. On December 17, 2003, certain NRC officials
became aware that (1) there was an underbilling error of at least
$500,000 for fiscal year 2003,[Footnote 8] (2) the underbilling error
may have resulted from an internal control deficiency within NRC's
licensee fee billing system that could affect the reliability of NRC's
fiscal year 2003 financial statements, and (3) further research was
needed to determine the cause of the error and whether the error was an
isolated incident or a systemic billing system weakness. Nevertheless,
on December 19, 2003,[Footnote 9] over 1 month prior to OMB's required
January 30, 2004 due date for federal agencies to issue their fiscal
year 2003 financial statements, NRC submitted its management
representation letter and financial statements to OMB.
Consistent with OMB Bulletin 01-02, Audit Requirements for Federal
Financial Statements,[Footnote 10] NRC should have timely notified the
IPA of the error and related internal control deficiency, but never
did. According to the IPA, it was not aware of the material error until
May 2004 when it independently discovered that NRC had recorded and
billed licensee fees during fiscal year 2004 that instead should have
been recorded and billed during fiscal year 2003. The IPA determined
that the underbilling error resulted from certain internal control
deficiencies related to NRC's fee billing system.
Based on its interpretation of the American Institute of Certified
Public Accountants (AICPA) Codification of Auditing Standards, AU
section 561, Subsequent Discovery of Facts Existing at the Date of the
Auditor's Report, the IPA stated that upon discovery of the error in
May 2004, it discussed the material error with NRC but did not advise
NRC to make appropriate disclosures of the newly discovered facts and
their effects on the fiscal year 2003 financial statements to persons
who may have been relying on such financial statements and related
auditor's report. The IPA told us that it came to this decision because
(1) it considered issuance of the fiscal years 2004 and 2003
comparative financial statements to be imminent and (2) in May 2004, it
did not think that any users would still be relying on the fiscal year
2003 financial statements and related auditor's report. However, in our
view, the issuance of NRC's fiscal years 2004 and 2003 comparative
financial statements, which occurred in November 2004, was not imminent
when the IPA discovered the material error in May 2004, more than 5
months prior to OMB's November 15, 2004 deadline for federal agencies
to issue their fiscal year 2004 financial statements. In addition, the
IPA did not provide us with documentation of the basis for its
conclusion that users were not likely to still be relying on the fiscal
year 2003 financial statements and would not attach importance to the
correction of the material error. In our view, such documentation
should include the identification of potential users, such as Congress,
OMB, GAO, and the Department of the Treasury (Treasury), and an
analysis of whether the users would likely be relying on the fiscal
year 2003 financial statements. We have some concerns that, without
notification, anyone who may have been relying on the fiscal year 2003
financial statements would not have known from May to mid-November
2004, or for more than 5 months, that NRC's originally issued financial
statements, which received an unqualified opinion, were materially
misstated and should not be relied on.
In addition to NRC's lack of effective internal controls over licensee
fees, we noted two areas where additional audit procedures could have
identified the problem at the time of the fiscal year 2003 audit.
During its audit of the fiscal year 2003 financial statements, the IPA
did not design or perform sufficient audit procedures to (1) determine
whether all eligible licensee fees[Footnote 11] were billed and
properly presented in the financial statements and (2) detect the
internal control deficiencies related to NRC's recording of licensee
fees.
We are making a recommendation to NRC's CFO to determine whether the
new procedures, which NRC represents as having been established,
effectively ensure that all eligible licensee fees are properly
recorded and billed. We are also making a recommendation to NRC's
Inspector General to work with the IPA so that audit procedures to test
for unrecorded and unbilled licensee fees and related internal controls
are fully and effectively implemented.
In commenting on a draft of this report, NRC's CFO and Inspector
General both concurred with the recommendation that we made to each of
them. We also received a technical comment from NRC's CFO, which we
have incorporated.
Background:
In conducting the fiscal year 2004 audit of the CFS, we reviewed the 23
CFO Act agencies' performance and accountability reports for possible
restatements and identified 11 agencies that had restated certain of
their audited fiscal year 2003 financial statements.
The primary intended users of federal agencies' financial reports are
citizens, Congress, federal executives, and federal program
managers.[Footnote 12] Each of these groups may use federal agencies'
financial statements to satisfy their specific needs. Citizens are
interested in many aspects of the federal government, particularly
federal programs that affect their financial well-being. Congress is
interested in monitoring and assessing the efficiency and effectiveness
of federal programs. Federal executives, such as central agency
officials at OMB and Treasury, are interested in federal financial
statements to assist the President of the United States. OMB assists
the President in overseeing the preparation of the federal budget by
formulating the President's spending plans, evaluating the
effectiveness of agency programs, assessing competing funding demands
among agencies, and setting funding priorities. Treasury assists the
President in managing the finances of the federal government and
prepares the CFS, which is based on audited financial statements
prepared by federal agencies. GAO audits the CFS and reports on the
results of its audit. Finally, federal program managers use agency
financial statements as tools for managing their operations within the
limits of the spending authority granted by Congress.
The primary accounting and auditing standards that apply to restatement
disclosures by federal entities are the Federal Accounting Standards
Advisory Board's Statement of Federal Financial Accounting Standards
(SFFAS) No. 21, Reporting Corrections of Errors and Changes in
Accounting Principles, and AU section 561.[Footnote 13]
Objective, Scope, and Methodology:
The objective of our review of restatements of NRC's fiscal year 2003
financial statements was to determine the nature and cause of the
errors, the transparency and timing of communicating the material
misstatements, any audit issues relating to such misstatements, and any
actions being taken to help preclude similar errors from occurring in
the future.
We reviewed the nature and causes of the restatements, and we also
examined corrective actions taken by NRC to help preclude similar
errors from occurring in the future. We interviewed the preparers and
auditors of NRC's fiscal year 2003 financial statements, including
staff from the agency's Office of Inspector General (OIG), and we
obtained and reviewed relevant audit documentation. Our work was not
designed to and we did not test the accuracy or appropriateness of the
restatements.
In our review, we considered certain accounting and auditing standards,
including SFFAS No. 21; OMB Bulletin 01-02; the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 16,
Prior Period Adjustments; and the AICPA Codification of Auditing
Standards, AU section 420, Consistency of Application of Generally
Accepted Accounting Principles, AU section 508, Reports on Audited
Financial Statements, and AU section 561.
We performed our review of the restatements of NRC's fiscal year 2003
financial statements from December 2004 to July 2005 in accordance with
U.S. generally accepted government auditing standards.
We requested comments on a draft of this report from NRC's CFO and
Inspector General or their designees. Written comments from NRC's CFO
and Inspector General are reprinted in enclosures I and II,
respectively, and are also discussed in the Agency Comments section.
Issues Related to Restatements of NRC's Fiscal Year 2003 Financial
Statements:
With respect to restatement of certain of NRC's fiscal year 2003
financial statements, we identified the following three areas that need
improvement: (1) certain internal controls related to NRC's recording
of licensee fees; (2) communication by NRC with the IPA, OIG, and users
of the financial statements concerning the identified material error;
and (3) audit procedures for unrecorded and unbilled licensee fees and
related internal controls. These issues are discussed in detail below.
Material Error Resulted from Deficiencies in Certain Internal Controls
Related to Recording Licensee Fees:
In fiscal year 2004, NRC restated certain of its fiscal year 2003
financial statements to reflect approximately $3 million in unrecorded
and unbilled licensee fees,[Footnote 14] which resulted from certain
internal control deficiencies related to NRC's fee billing system. NRC
inspects its licensees' facilities and users of nuclear materials to
ensure compliance with regulatory requirements and recovers most of its
appropriations from inspection fees paid by NRC licensees. If NRC does
not bill its licensees or does not bill them for the full amount they
owe, NRC's Accounts Receivable and related revenue will be understated
and the federal government may not receive the full amount of fees to
which it is entitled.
According to NRC's IPA, during fiscal year 2003, the fee billing system
failed to include all billable hours in the invoices issued to NRC's
licensees. The IPA stated that this condition resulted from the
following deficiencies:
* inadequate testing by NRC of the fee billing system to ensure that
modifications to system software performed as intended,
* use of intensive manual processes, and:
* lack of comprehensive quality assurance procedures over the billing
process.[Footnote 15]
As a result, NRC had to restate its originally issued fiscal year 2003
Balance Sheet, Statement of Net Cost, Statement of Changes in Net
Position, and Statement of Financing to accurately reflect
approximately $3 million in licensee fees that had not been recorded
and billed.
The $3 million unrecorded and unbilled licensee fees error represented
about 5 percent of the Other Intragovernmental Liabilities[Footnote 16]
and about 6 percent of the Accounts Receivable balances on the
originally issued fiscal year 2003 Balance Sheet, approximately 5
percent of Net Cost of Operations[Footnote 17] on NRC's originally
issued fiscal year 2003 Statement of Net Cost,[Footnote 18] about 5
percent of the Total Financing Sources component of Cumulative Results
of Operations on NRC's originally issued fiscal year 2003 Statement of
Changes in Net Position, and approximately 4 percent of the Total
Resources Used to Finance Activities on NRC's originally issued fiscal
year 2003 Statement of Financing. Because at the time of the issuance
of NRC's fiscal years 2004 and 2003 comparative financial statements
there was insufficient evidence to support the completeness of the
Accounts Receivable and related revenue balances reported in NRC's
restated fiscal year 2003 financial statements, the IPA updated the
originally issued unqualified opinion to a qualified opinion.
According to NRC officials, the fee billing system has since been
modified to improve the functionality of the system's interface, and
the acceptance testing of fee billing system software modifications has
been expanded and is now independently validated and verified. The
officials also stated that they implemented a manual internal control
procedure that compares the number of inspection hours billed by NRC on
licensee invoices against the number of hours eligible to be charged to
inspections by NRC staff as indicated in the NRC inspection database.
These procedures are to be performed throughout the year and thus are
intended to determine, on a timely basis, that all eligible hours have
been billed.
Identified Material Error Was Not Communicated Timely:
NRC's management representation letter, dated November 20, 2003,
included representations that NRC's fiscal year 2003 financial
statements were fairly stated and that the agency had effective
internal controls. As of the same date, the IPA dated its audit report,
which contained an unqualified, or clean, audit opinion on NRC's fiscal
year 2003 financial statements. On December 17, 2003, certain NRC
officials became aware that (1) there was an underbilling error of at
least $500,000 for fiscal year 2003, (2) the underbilling error may
have resulted from an internal control deficiency within NRC's licensee
fee billing system that could affect the reliability of NRC's fiscal
year 2003 financial statements, and (3) further research was needed to
determine the cause of the error and whether the error was an isolated
incident or a systemic billing system weakness. Nevertheless, on
December 19, 2003, over 1 month prior to OMB's required January 30,
2004 due date for federal agencies to issue their fiscal year 2003
financial statements, NRC submitted its management representation
letter and financial statements to OMB.
Subsequently, NRC researched the problem and by February 2004 had
completed a preliminary review of NRC's fiscal year 2003 licensee fees.
This review identified a total of about $2.4 million of unrecorded and
unbilled licensee fees for fiscal year 2003. NRC continued to research
the issue and by November 2004 found additional unrecorded and unbilled
licensee fees. In total, approximately $3 million in unrecorded and
unbilled licensee fees was identified for fiscal year 2003.
According to the OIG, despite the fact that NRC officials met with the
agency's IPA and OIG on several occasions between the time that NRC's
staff discovered the billing error and the IPA subsequently discovered
the error, NRC did not report the billing error to the IPA or OIG.
Specifically, the IPA and OIG stated that they were totally unaware of
the error until the IPA discovered in May 2004 that NRC, as a result of
the error, had recorded licensee fees and issued bills during fiscal
year 2004 for licensee fees that instead should have been recorded and
billed in fiscal year 2003. In accordance with OMB Bulletin 01-02,
there shall be open and timely communication throughout the audit
process between agency officials, including the CFO and the OIG, as
well as the IPA if one is used, which would include potential audit
findings, materially misstated or unsupported amounts in the financial
statements, and material weaknesses in internal control. Accordingly,
NRC officials had a responsibility to report the billing error and, if
known, the cause of the error to the IPA when NRC became aware of it on
December 17, 2003, because of the effect that the error could have on
the fiscal year 2003 financial statements. Failure to timely provide
this information is a serious matter that violates the tenets of the
relationship between the audited entity and the auditor. As a result,
NRC's OIG initiated an investigation of the matter and issued an
internal report dated February 14, 2005, which we reviewed as part of
our work, that discusses the details of the material error noted above.
After NRC's IPA independently discovered the error in May 2004, the IPA
discussed the error with NRC but did not advise NRC to notify the users
of the financial statements, such as Congress, OMB, GAO, and Treasury,
about the material error. According to AU section 561, once the auditor
becomes aware of subsequently discovered information that is found to
be both reliable and to have existed at the date of the auditor's
report, the auditor should take certain actions if the nature and
effect of the matter are such that (1) the auditor's report would have
been affected if the information had been known to the auditor at the
date of the report and had not been reflected in the financial
statements and (2) the auditor believes there are persons currently
relying or likely to rely on the financial statements who would attach
importance to the information. If these conditions are met, the auditor
should advise the reporting entity to make appropriate disclosures of
the newly discovered facts and their effects on the financial
statements to persons who are known to be relying or who are likely to
rely on the financial statements and the related auditor's report. AU
561 states that when issuance of financial statements accompanied by
the auditor's report for a subsequent period is imminent, so that
disclosure is not delayed, appropriate disclosure of the revision can
be made in such statements instead of reissuing the earlier statements.
AU section 561 also states that if a material error in the prior year
financial statements has been discovered but the effect of the
subsequently discovered information cannot be quantified without a
prolonged investigation, appropriate disclosure would consist of the
reporting entity notifying users known or likely to be relying on the
financial statements and the related auditor's report that the
statements and auditor's report should not be relied on and that
revised financial statements and a revised auditor's report will be
issued upon completion of an investigation. AU section 561 further
states that the auditor should take whatever steps are necessary to be
satisfied that the reporting entity has made the appropriate
disclosures.
However, until the issuance of NRC's fiscal years 2004 and 2003
comparative financial statements on November 15, 2004, users of NRC's
financial statements were not aware that certain of the fiscal year
2003 financial statements originally issued were materially misstated.
Based on its interpretation of AU 561, the IPA stated that it discussed
the error with NRC but did not advise NRC to make appropriate
disclosures of the newly discovered facts and their effects on the
fiscal year 2003 financial statements to persons known to rely or
likely to rely on such financial statements and related auditor's
report. The IPA told us that it came to this decision because (1) it
considered issuance of the fiscal years 2004 and 2003 comparative
financial statements to be imminent and (2) in May 2004, it did not
think that any users would still be relying on the fiscal year 2003
financial statements and related auditor's report. However, in our
view, the issuance of NRC's fiscal years 2004 and 2003 comparative
financial statements, which occurred in November 2004, was not imminent
when the IPA discovered the material error in May 2004, more than 5
months prior to OMB's November 15, 2004 deadline for federal agencies
to issue their fiscal year 2004 financial statements. In addition, the
IPA did not provide us with documentation of the basis for its
conclusion that users were not likely to still be relying on the fiscal
year 2003 financial statements and would not attach importance to the
correction of the material error. In our view, such documentation
should include identification of potential users, such as Congress,
OMB, GAO, and Treasury, and an analysis of whether the users would
likely be relying on the fiscal year 2003 financial statements. We have
concerns that, without notification, anyone who may have been relying
on the fiscal year 2003 financial statements would not have known from
May to mid-November 2004, or for more than 5 months, that NRC's
originally issued financial statements, which received an unqualified
opinion, were materially misstated and should not be relied on.
Audit Procedures Did Not Detect Unrecorded and Unbilled Licensee Fees
and Related Internal Control Deficiencies:
The above-noted material error was not discovered during the audit of
NRC's fiscal year 2003 financial statements because the IPA did not
design or perform sufficient audit procedures to (1) determine whether
all eligible licensee fees were billed and properly presented in the
financial statements and (2) detect the previously noted internal
control deficiencies related to NRC's recording of licensee fees.
According to the Financial Audit Manual (FAM),[Footnote 19] the auditor
should perform audit procedures to test for all significant
assertions[Footnote 20] in significant financial statement line items
and accounts. The FAM states that an assertion is significant if
misstatements in the assertion could exceed test materiality for the
related line item, account, or disclosure. Based on the materiality of
NRC's Accounts Receivable and related revenue and the potential for
material understatement, the auditor should have identified the
completeness assertion as significant and performed audit procedures to
determine whether all applicable fees were billed and presented in the
financial statements. To test for completeness, the auditor should (1)
select from an independent population of items that should be recorded
in the account, (2) select items that should be recorded from a source
that is likely to contain all the items that should be recorded, and
(3) determine whether the selected items are included in the recorded
balance. However, although the IPA did perform certain audit procedures
during fiscal year 2003 to test Accounts Receivable and related
revenue, the IPA did not design or perform audit procedures to test for
the completeness assertion. For example, we found no documentation of
audit procedures to compare the total number of inspection hours billed
by NRC on licensee invoices against the total number of hours charged
to inspections by NRC staff in the NRC inspection database in order to
determine if all eligible hours had been billed.
Also, during the fiscal year 2003 audit, the IPA did not identify and
report the internal control deficiencies, described earlier in this
report, that led to NRC's failure to bill for all applicable licensee
fees. According to OMB Bulletin 01-02, auditors are responsible for
performing sufficient tests of internal controls that have been
properly designed and placed in operation to support a low level of
assessed control risk.[Footnote 21] However, the IPA's fiscal year 2003
audit procedures were not sufficient to detect NRC's internal control
deficiencies. The IPA stated that it took corrective action in fiscal
year 2004 and designed audit procedures to detect unrecorded and
unbilled licensee fees and to test related internal controls.
Conclusions:
NRC did not disclose the material error it detected in its fiscal year
2003 financial statements to its IPA or OIG. In addition, in our view,
NRC did not timely disclose the material error to users of its
financial statements. NRC corrected the error and issued restated
financial statements as part of its fiscal years 2004 and 2003
comparative financial statements on November 15, 2004, more than 8
months after NRC determined that the error totaled at least $2.4
million and about 11 months after it first became aware of an
underbilling error. Going forward, it will be important for NRC to
ensure that its new procedures, which it represents as having been
implemented, effectively address the cause of the error. In addition,
it will be important that the agency promptly notify its IPA and OIG of
any errors it discovers in future financial statements. It will also be
important that NRC's auditor fully and effectively implement audit
procedures to detect any similar errors or internal control
deficiencies in the future.
Recommendations for Executive Action:
We recommend that NRC's Chief Financial Officer determine whether the
new procedures, which NRC represents as having been established,
effectively ensure that all eligible licensee fees are recorded and
billed.
We recommend that NRC's Inspector General work with NRC's IPA so that
audit procedures to test for unrecorded and unbilled licensee fees and
related internal controls are fully and effectively implemented.
Agency Comments:
In written comments on a draft of this report, which are reprinted in
enclosures I and II, NRC's CFO and Inspector General, in separate
letters, concurred with the recommendations that we made to each of
them. We also received a technical comment from NRC's CFO, which we
have incorporated.
Within 60 days of the date of this report, we would appreciate
receiving a written statement on actions taken to address these
recommendations.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Homeland Security and
Governmental Affairs; the Subcommittee on Federal Financial Management,
Government Information, and International Security, Senate Committee on
Homeland Security and Governmental Affairs; the House Committee on
Government Reform; and the Subcommittee on Government Management,
Finance and Accountability, House Committee on Government Reform. In
addition, we are sending copies to the Fiscal Assistant Secretary of
the Treasury and the Controller of OMB. This report is also available
at no charge on GAO's Web site at www.gao.gov.
We appreciate the courtesy and cooperation extended to us by your staff
throughout our work. We look forward to continuing to work with your
offices to help improve financial management in the federal government.
If you have any questions about the contents of this report, please
contact me at (202) 512-3406 or engelg@gao.gov.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
[End of section]
Enclosure I: Comments from the Chief Financial Officer, Nuclear
Regulatory Commission:
UNITED STATES NUCLEAR REGULATORY COMMISSION:
CHIEF FINANCIAL OFFICER:
WASHINGTON, D.C. 20555-0001:
October 19, 2005:
Mr. Gary T. Engel, Director:
Financial Management Assurance:
United States: Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Engel:
Thank you for the opportunity to review the United States Government
Accountability Office's draft report, Financial Audit. Restatement to
the Nuclear Regulatory Commissions Fiscal Year 2003 Financial
Statements.
I agree with the report's recommendation that the Nuclear Regulatory
Commission's Chief Financial Officer determine whether the new fee
billing procedures effectively ensure that all eligible licensee fees
are recorded and billed. However, to more accurately reflect the
actions the Nuclear Regulatory Commission has taken with respect to its
fee billing system, I recommend the following change to the first
sentence of the last paragraph on page 13 of the draft report:
According to NRC officials, the fee billing system has since been
modified to improve the functionality of the system's interface, and
the acceptance testing of fee billing system software modifications has
been expanded and is now independently validated and verified.
If you have any questions concerning our response, please contact Mary
S. Givvines, Director, Division of Financial Management on (301) 415-
7379.
Sincerely,
Signed by:
Jesse Funches:
cc: Chairman Diaz;
Commissioner McGaffigan;
Commissioner Merrifield;
Commissioner Jaczko;
Commissioner Lyons;
L. A. Reyes, EDO;
M. Malloy, OEDO.
[End of section]
Enclosure II: Comments from the Inspector General, Nuclear Regulatory
Commission:
UNITED STATES NUCLEAR REGULATORY COMMISSION:
OFFICE OF THE INSPECTOR GENERAL:
WASHINGTON, D.C. 20555-0001:
October 14, 2005:
Mr. Gary T. Engel,
Director:
Financial Management and Assurance:
United States Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Engel:
The U. S. Nuclear Regulatory Commission (NRC), Office of the Inspector
General appreciates the opportunity to respond to the Government
Accountability Office (GAO) report entitled Financial Audit:
Restatements to the Nuclear Regulatory Commission's Fiscal Year 2003
Financial Statements.
One point in the report requires clarification.
This relates to the comment on the tests of completeness. On page 19 of
the draft report, the statement is made that GAO found "no
documentation of audit procedures to compare the total number of
inspection hours billed by NRC on licensee invoices against the total
number of hours charged to inspections by NRC staff in the NRC
inspection database in order to determine if all eligible hours had
been billed."
OIG response: There is no "inspection database" that includes all the
hours billed during a particular year. Data in the fee billing system
comes from several sources. As a result, the testing of completeness is
accomplished through a variety of alternative techniques.
We have reviewed the report and concur with the recommendation that
NRC's Inspector General work with its IPA so that audit procedures to
test for unrecorded and unbilled licensee fees and related internal
controls are fully and effectively implemented.
Thank you for the opportunity to review the draft copy of this report.
If you have any questions regarding this response, please contact
Stephen Dingbaum, Assistant Inspector General for Audits, at (301) 415-
5915.
Sincerely,
Signed by:
Hubert T. Bell:
Inspector General:
cc: Chairman Diaz;
Commissioner Merrifield;
Commissioner Jaczko;
Commissioner Lyons;
Commissioner McGaffigan;
Luis Reyes, EDO;
Melinda Malloy, OEDO.
The following is a comment on the Nuclear Regulatory Commission's (NRC)
Inspector General letter dated October 14, 2005.
GAO Comment:
1. NRC's Inspector General noted that there is no "inspection database"
that includes all the hours billed during a particular year. We agree.
Our report does not state that the inspection database includes all the
hours billed during a particular year. Instead, this report states that
the NRC inspection database includes the hours eligible to be charged
to inspections by NRC staff. NRC's Inspector General also stated that
data in the fee billing system comes from several sources and, as a
result, the testing of completeness is accomplished through a variety
of alternative techniques. While we agree that data in the fee billing
system comes from several sources and that the testing of completeness
can be accomplished through several means, the IPA's fiscal year 2003
audit procedures were not designed or performed to test for the
completeness assertion.
[End of section]
(198394):
FOOTNOTES
[1] The Government Management Reform Act of 1994 has required such
reporting, covering the executive branch of government, beginning with
financial statements prepared for fiscal year 1997. 31 U.S.C. § 331
(e). The federal government has elected to include certain financial
information on the legislative and judicial branches in the CFS as
well.
[2] A financial statement restatement occurs when an entity either
voluntarily or prompted by its auditors or regulators revises public
financial information that has previously been reported.
[3] According to Federal Accounting Standards Advisory Board, Statement
of Federal Financial Accounting Standards (SFFAS) No. 21, Reporting
Corrections of Errors and Changes in Accounting Principles, prior
period financial statements presented should be restated only to
correct errors that caused such statements to be materially misstated.
[4] The Federal Emergency Management Agency (FEMA) was transferred to
the Department of Homeland Security (DHS) effective March 1, 2003. With
this transfer, FEMA was no longer required to prepare and have audited
stand-alone financial statements under the CFO Act, leaving 23 CFO Act
agencies for the remainder of fiscal year 2003 and for fiscal year
2004. The DHS Financial Accountability Act, Pub. L. No. 108-330, 118
Stat. 1275 (Oct. 16, 2004), added DHS to the list of CFO Act agencies,
increasing the number of CFO Act agencies again to 24 beginning in
fiscal year 2005.
[5] The 2 agencies that had restatements for fiscal year 2003 but did
not receive unqualified opinions on their originally issued fiscal year
2003 financial statements were the Department of Defense and the Small
Business Administration.
[6] Transparency is the full, accurate, and timely disclosure of
information.
[7] Licensee fees include fees related to reactor and materials
inspections.
[8] Underbilling error was discovered by NRC as a result of an inquiry
from an NRC licensee.
[9] Although OMB encouraged CFO Act agencies to accelerate issuance of
their fiscal year 2003 audited financial statements to November 15,
2003 (or as close to that date as possible) in preparation for the
accelerated reporting date for fiscal year 2004, OMB's required due
date for agencies' fiscal year 2003 audited financial statements was
January 30, 2004.
[10] Office of Management and Budget, Bulletin 01-02, Audit
Requirements for Federal Financial Statements (Washington, D.C.: Oct.
16, 2000).
[11] Certain fees are exempt from fee collection by regulation.
[12] Federal Accounting Standards Advisory Board, Statement of Federal
Financial Accounting Concepts No. 1, Objectives of Federal Financial
Reporting.
[13] Generally accepted government auditing standards incorporate AICPA
reporting and auditing standards unless the Comptroller General of the
United States excludes them by formal announcement.
[14] According to NRC officials, since NRC was already restating the
fiscal year 2003 financial statements for this $3 million material
error, it also decided to correct for less significant errors that had
been identified. Specifically, the fiscal year 2003 Balance Sheet was
restated for $777 thousand relating to capital leases, and the fiscal
year 2003 Statement of Budgetary Resources was restated for $4.7
million for unfilled customer orders. These errors were not deemed
material by NRC's IPA.
[15] Procedures to detect potential underbillings were not effective
because they did not provide for reconciliations of data generated by
different sources. Such reconciliations are used to identify unrecorded
and unbilled fees and erroneous licensee invoices. In addition, some
reports produced by the fee system did not contain totals to enable
comparisons of invoices to data sources, thus complicating the process
to detect potential underbillings.
[16] The Other Intragovernmental Liabilities account increased by
approximately $3 million from approximately $57 million, as originally
reported in fiscal year 2003, to approximately $60 million when
restated in the fiscal year 2004 and 2003 comparative financial
statements. The underbilling error affected Other Intragovernmental
Liabilities because NRC incurs a liability to offset the net accounts
receivable for fees assessed. This liability represents amounts which,
when collected, will be transferred to Treasury to offset NRC's
appropriations in the year collected. Therefore, the Total Financing
Sources component of Cumulative Results of Operations on the Statement
of Changes in Net Position and the Total Resources Used to Finance
Activities on the Statement of Financing were restated to capture the
effect of NRC's obligation to transfer funds to Treasury for fees
assessed.
[17] The $3 million licensee fees error represented almost 1 percent of
the Earned Revenues from the Public reported on NRC's originally issued
fiscal year 2003 Statement of Net Cost.
[18] In addition, Net Cost of Operations reported on NRC's originally
issued fiscal year 2003 Statement of Changes in Net Position and
Statement of Financing were also understated by approximately 5
percent.
[19] GAO/President's Council on Integrity and Efficiency, Financial
Audit Manual, GAO-01-765G (Washington, D.C.: July 2001), updated by GAO-
04-1015G and GAO-04-942G (July 2004).
[20] Financial statement assertions are management representations that
are embodied in financial statement components. The assertions can be
either explicit or implicit and can be classified into the following
categories: (1) existence or occurrence, (2) completeness, (3) rights
and obligations, (4) valuation or allocation, and (5) presentation and
disclosure.
[21] Control risk is the risk that a material misstatement that could
occur in an assertion will not be prevented or detected and corrected
on a timely basis by the entity's internal control.
